HS355 Practice Exam Flashcards
1
Q
1. Cyrus is a participant in his company’s defined-benefit plan. The benefit formula provides for a life annuity beginning at age 65 in the amount of 1 percent of final average compensation multiplied by years of service. Cyrus is married and attains age 65 with 35 years of service and $5,000 of final average compensation. What is Cyrus’s monthly benefit under the formula? (LO 13-1-1) A. $1,000 B. $1,750 C. $3,500 D. $5,000
A
- The answer is B. The calculation is 1% x $5,000 x 35.
2
Q
- Sally, age 64, is planning to retire in one year. Her company has a cash balance plan that has a contribution credit of 7 percent of total compensation plus a 4 percent interest credit and the participant’s benefit is the accumulated hypothetical account balance. Which of the following statements concerning her benefit is correct? (LO 13-1-1)
A. Sally will have to take the distribution in a form of lump sum.
B. If the S&P 500 index increases by 25 percent this year, her benefit is likely to increase by 25 percent.
C. If Sally cuts back her hours and lowers her compensation this year, it could affect the contribution credits for previous years of service.
D. If Sally elects a life annuity, it will be the actuarial equivalent of the lump sum using the actuarial factors stated in the plan document.
A
- The answer is D. A is incorrect as cash balance plans must offer annuity forms of
payment. B is incorrect as market performance does not affect Sally’s benefit. C is
incorrect as a change in the current year’s compensation only affects this year’s.
3
Q
- Which of the following statements concerning recent IRS and DOL guidance on lifetime income options in tax-advantaged retirement plans is correct? (LO 13-1-2)
A. Because of perceived abuses, the IRS and Department of Labor are looking for ways to eliminate annuity options in defined contribution plans.
B. Proposed regulations give defined-benefit plans guidance on how to allow participants to partially annuitize their benefit.
C. A revenue ruling allows a defined-benefit plan participant to transfer a lump sum value of their benefit into the same company’s 401(k) plan.
D. Regulations outlaw the use of longevity insurance in 401(k) plans and IRAs
A
- The answer is B. A is incorrect since both the IRS and the DOL have issued guidance
that encourages lifetime income options in defined contribution plans. C is incorrect
since the guidance allows the 401(k) participant to transfer a lump sum to the definedbenefit
plan and receive an additional annuity from that plan. D is incorrect as
regulations have made it easier to purchase longevity insurance in an IRA or qualified
plan.
4
Q
- Sylvia dies while still employed as a participant in a 401(k) plan. A portion of her
account was invested in a life insurance contract. Assuming the policy had a face value
of $100,000, a cash value of $25,000, and $5,000 of accumulated Table 2001 amounts,
how much of the $100,000 death proceeds is taxable income to Sylvia’s heir? (LO 13-2-
1)
A. $0
B. $20,000
C. $70,000
D. $100,000
A
- The answer is B. The $75,000 pure term portion of the death benefit is tax-free
($100,000 minus the $25,000 cash value). In addition the $5,000 of Table 2001
amounts can be recovered by the beneficiary, meaning that $80,000 is tax-free and
$20,000 is taxable.
5
Q
- Arthur, age 50, needs to take a withdrawal from his IRA and would like to avoid the
10% early withdrawal penalty tax using the substantially equal periodic payment
exception. Which of the following statements concerning this exception as it applies to
Arthur is correct? (LO 13-2-2)
A. Arthur will have to take withdrawals for at least 5 years but can make changes
after that.
B. If Arthur elects the amortization method, he can make a one-time change to
the required minimum distribution approach.
C. Once the distribution amount is calculated, Arthur will be able to increase but
not decrease withdrawals each year.
D. Arthur can continue to make contributions to the same IRA after withdrawals
have begun
A
- The answer is B. A is incorrect as Arthur will have to take withdrawals for 9½ years
until he attains age 59½. C is incorrect since Arthur can neither increase nor decrease
the required amount. D is incorrect since the rules require that there are no additional
contributions, transfers or other changes to the account once the substantially equal
periodic payments have begun.
6
Q
- Which of the following statements concerning the exceptions to the 10 percent early
withdrawal penalty tax is correct? (LO 13-2-2)
A. The age 55 exception only applies to distributions from IRAs.
B. To comply with the disability exception, the individual only has to demonstrate
that he or she can continue in the same occupation.
C. The deductible medical expense exception becomes easier to qualify for
beginning in 2013.
D. The death benefit exception applies to all distributions made to an adult child
beneficiary
A
- The answer is D. A is incorrect as the age 55 exception only applies to qualified plans
and 403(b) annuities. B is incorrect as the disability exception requires that the
individual be unable to sustain any gainful activity. C is incorrect as the deductible
medical expense exception becomes more difficult to qualify for in 2013, as the
threshold increases from 7.5% to 10% of adjusted gross income.
7
Q
- Karen, age 65, is a 401(k) plan participant who is terminating employment. She will
receive a distribution that includes $250,000 in cash and $150,000 of stock, which had a
value of $50,000 when it was allocated to her account. She is in the 25 percent tax
bracket and is not going to sell the stock for a number of years. What is the tax
treatment if she rolls the cash into an IRA and takes the stock into income? (LO 13-2-3)
A. $0
B. $12,500
C. $25,500
D. $37,500
A
- The answer is B. Karen pays tax (at a 25% tax rate) on $50,000, the value of the
stock when it was allocated to her account. Since she has over age 59 ½, she does not
pay the 10% early withdrawal penalty tax.
8
Q
- Bud, age 60, has a single Roth IRA (for 8 years) with a current value of $35,000 and
$25,000 of contributions. If Bud withdraws all $35,000 to pay for his son’s $35,000
college tuition and is subject to a 25 percent Federal income tax rate, how much does
he pay in Federal income and penalty taxes? (LO 13-2-5)
A. $0
B. $2,500
C. $3,500
D. $6,250
A
- The answer is A. The withdrawal is a qualifying withdrawal making it exempt from
income taxes.
9
Q
- Junior, age 40, has two Roth IRAs. One is valued at $20,000 and has $10,000 of
contributions. The other was converted last year and income taxes were paid on the
entire $100,000 converted. Today, the account is worth $110,000. Considering Federal
income taxes and penalty taxes and a 25% tax rate, how much in taxes will be paid if
Junior withdraws $30,000 from the converted Roth IRA. (LO 13-2-5)
A. $0
B. $2,000
C. $5,000
D. $7,000
A
- The answer is B. The first $10,000 is considered a return of contributions. The next
$20,000 represents converted amounts that have been taxed. These are not subject to
income taxes but will be subject to the 10% early withdrawal penalty tax.
10
Q
- Pete, age 74, is retired and owns two IRAs, an inherited IRA from his father, and a
403(b) annuity. Which of the following statements concerning the required minimum
distributions for these plans for the current year is correct? (LO 13-3-1)
A. Pete can take the required distribution for the 403(b) plan from the inherited
IRA.
B. Pete can take the required distribution for both of his IRAs from one IRA.
C. Pete can take the required distributions for all plans from the inherited IRA.
D. Pete can take the required distributions for both of his IRAs from his 403(b)
plan.
A
- The answer is B. A is incorrect, inherited IRAs and 403(b) plans cannot be
aggregated. C is incorrect as IRAs and 403(b) plans cannot be aggregated with an
inherited IRA. D is incorrect as IRAs and 403(b) plans cannot be aggregated.
11
Q
- Peter attained age 70½ on 9/1/2012. His IRA account balance was $250,000 on
12/31/2011. According to the uniform lifetime table, the divisor is 27.4 for a 70-year-old,
26.5 for a 71-year-old and 25.6 for a 72-year-old. The minimum distribution that must be
distributed by the required beginning date is (LO 13-3-1)
A. $0
B. $9,124
C. $9,434
D. $10,377
A
- The answer is B. The calculation is $250,000 divided by 27.4 (as Peter is age 70 at
the end of the first distribution year).
12
Q
- Peter attained age 70½ on 9/1/2012. His IRA account balance was $250,000 on
12/31/2011 and $275,000 on 12/31/2012. According to the uniform lifetime table, the
divisor is 27.4 for a 70-year-old, 26.5 for a 71-year-old and 25.6 for a 72-year-old. The
minimum distribution that is required for the second distribution year is (LO 13-3-1)
A. $0
B. $9,434
C. $10,377
D. $10,742
A
- The answer is C. The calculation is $275,000 divided by 26.5.
13
Q
- Barry dies on 12/1/2011 at age 80 with an IRA account valued $300,000 on
12/31/2010 and $280,000 on 12/31/2011. On 9/30/2012, his sole beneficiary is Daryl,
his daughter who was born 9/1/1958. The divisor from the uniform lifetime table for an
80-year-old is 18.7. Under the single life expectancy table, the life expectancy is 31.4 for
a 53-year-old, 30.5 for age 54, 29.6 for age 55, 28.7 for age 56. What is the required
minimum distribution for 2012, the year following death? (LO 13-3-2)
A. $0
B. $9,180
C. $9,554
D. $14,973
A
- The answer is B. The calculation is $280,000 divided by 30.5
14
Q
- Barry dies on 12/1/2011 at age 80 with an IRA account valued $300,000 on
12/31/2010 and $280,000 on 12/31/2011. On 9/30/2012, his sole beneficiary is Daryl,
his daughter who was born 9/1/1958. The divisor from the uniform lifetime table for an
80-year-old is 18.7. Under the single life expectancy table, the life expectancy is 31.4 for
a 53-year-old, 30.5 for age 54, 29.6 for age 55, 28.7 for age 56. What is the required
minimum distribution for 2013 if the account balance on 12/31/2012 was $270,000? (LO
13-3-2)
A. $8,599
B. $9,122
C. $9,153
D. $9,407
A
- The answer is C. The calculation is $270,000 divided by 29.5. The 29.5 is
determined by taking the beneficiary’s life expectancy in the year following death (for a
54 year old it is 30.5) reduced by 1.
15
Q
- Jennie is enrolled in Medicare Part A. She suffers a stroke and is admitted to an
inpatient hospital for care, which initiates a benefit period. She is in the hospital for
twenty-five days and then is released. How many more days of coverage does she have
in the benefit period (not counting life-time reserve days)? (LO 14-1-2)
A. 35 days
B. 60 days
C. 65 days
D. 90 days
A
- The answer is C. Medicare covers 90 days in a hospital in a benefit period. Jennie
has 65 days remaining (90 -25).
16
Q
- In 2013, which of the following is the amount of the Part A inpatient hospital
deductible? (LO 14-2-1)
A. $1,054 is the 2013 Part A inpatient hospital deductible.
B. $1,184 is the 2013 Part A inpatient hospital deductible.
C. $2,000 is the 2013 Part A inpatient hospital deductible.
D. $2,154 is the 2013 Part A inpatient hospital deductible.
A
- The answer is B. $1,184 is the correct deductible for 2013.
17
Q
- Shannon will turn 65 on May 5, 2013 and become eligible for Medicare. Which of
the following reflects her initial enrollment period timeline for Medicare Part A? (LO 14-
2-1)
A. Shannon may enroll during any of the following months: February, March,
April, May, June, July, or August.
B. Shannon may enroll during May only.
C. Shannon may enroll during March, April and May only.
D. Shannon may enroll during any of the following months: May, June, July,
August, September, October, or November.
A
- The answer is A. The period is 3 months prior to the month in which the individual
turns 65, that month, and the 3 months following (7-month window
18
Q
18. Which of the following is an Instrumental Activity of Daily Living (IADL)? (LO 15-1-1) A. Bathing B. Shopping C. Dressing D. Walking
A
- The answer is B. The others are all ADLs. Other IADLs include managing money,
using the telephone, preparing meals, and managing medication
19
Q
- Which of the following statements accurately describes Medicare’s role in long-term
care financing? (LO 15-1-2)
A. Medicare is the largest government financing option for long-term care
expenditures.
B. Medicare often covers custodial care for ADLs.
C. Medicare does not cover any post-acute care services in the home.
D. Medicare may cover some Nursing Home care costs for a short period of
time.
A
- The answer is D. Medicare does cover some post-acute care recovery in a nursing
home
20
Q
- Which of the following statements is correct regarding respite care? (LO 15-1-3)
A. Medicare does not cover respite care.
B. Respite care can be provided for weeks at a time.
C. Respite care cannot be provided by informal caregivers.
D. Respite care can only be provided in an institutional setting.
A
- The answer is B. Medicare can cover up to five days of respite care. Respite care
can be provided for weeks at a time at home or in an institutional setting and can be
provided by skilled or informal caregivers
21
Q
- Which of the following statements best describes why long-term care insurance
premiums increased significantly in the 2000s? (LO 15-2-1)
A. Long-term care benefits became much more robust.
B. The cost of long-term care expenditures grew significantly faster than
expected.
C. Less policy holders renewed their policies, lowering the amount of funds
available to insurance companies to pay out benefits.
D. Persistency rates were higher than expected
A
- The answer is D. The persistency rate was too low. Most insurance companies were
expecting persistency rates near 95%/year but in actuality they were near 99-
100%/year. This resulted in not enough premiums to cover the existing policies.
22
Q
- If a client wanted to self-fund a significant portion of his or her long-term care
expenditures out of pocket, but wanted to have some backside protection with minimum
premium costs, which of the following elimination periods would this client prefer? (LO
15-2-2)
A. 90 calendar day elimination period
B. 90 service day elimination period
C. 60 calendar day elimination period
D. 60 service day elimination period
A
- The answer is B. A shorter calendar day elimination period is more expensive, and
the calendar day elimination periods are more expensive than service day elimination
periods. This would enable the client to cover the first 90 days of service charges out of
pocket but still enable him or her to have some long-term care insurance protection at
the cheapest comparative cost.
23
Q
- Which of the followings statements is true regarding long-term care policies? (LO
15-2-3)
A. Benefits paid from a non-tax qualified LTC policy are not received tax-free by
the insured.
B. Premiums paid by the insured for a tax-qualified cash LTC policy may be
deductible.
C. Premiums paid by the insured for a tax-qualified indemnity LTC policy are not
deductible.
D. Non-tax qualified LTC policies are always guaranteed renewable
A
- The answer is B. Benefits received from a non-tax qualified long-term care
insurance policy can be received tax-free. Premiums paid for tax qualified cash and
indemnity policies can be deductible up to certain amounts. Non-tax qualified long-term
care policies do not have to be guaranteed renewable.
24
Q
- Andrew, preparing to enter a nursing home, files his Medicaid application. Because
the average nursing home cost in his area is $5,000/month, Andrew wants to make sure
he qualifies for Medicaid. As such, Andrew gives away $200,000 to his sister. How long
will Andrew be ineligible for Medicaid due to this transfer? (LO 15-3-2)
A. Andrew will not be ineligible for Medicaid.
B. Andrew will be ineligible for the full 60-month look-back period.
C. Andrew will be ineligible for 40 months.
D. Andrew will be ineligible for 20 months
A
- The answer is C. Transfer/average Nursing Home care = 200,000/5,000 – 40
months.
25
Q
- Which of the following statements is true regarding The Older American Act
Program? (LO 15-3-3)
A. It was initially enacted to provide coordination of Alzheimer’s disease care
services.
B. It provides long-term care housing.
C. It worked in conjunction with the Federal government to create “The Own
Your Future Awareness Campaign,” designed to raise awareness about
Alzheimer’s disease.
D. It provides respite care services to family caregivers.
A
- The answer is D. The Older American Act Program – Life-Span Respite Care
Program helps provide respite care to family caregivers
26
Q
- Which of the following is a benefit of a qualified State Partnership Program longterm
care insurance policy? (LO 15-3-4)
A.Qualified plans are typically the most affordable.
B.Qualified plans do not need expensive inflation protections.
C.Qualified plans are partially funded by the State.
D.Qualified plans enable more effective Medicaid “spend-down” planning.
A
- The answer is D. The benefit of the qualified policy is to protect assets from
Medicaid spend-down and asset eligibility requirements
27
Q
- Which of the following statement regarding group long-term care insurance policies
is correct? (LO 15-5-2)
A. Group polices are rarely portable.
B. Group policies are more expensive than individual polices for people with
poor health.
C. Group policies are required to have inflation protections.
D. Group policies can be used to help protect a person’s insurability
A
- The answer is D. Group policies often have less stringent underwriting
requirements, allowing some clients with poor health to purchase long-term care
insurance and protect their insurability.
28
Q
- Which of the following statements is true regarding filial laws? (LO 15-5-4)
A. Filial laws are rarely invoked to make family members pay long-term care
expenditures of a family member in a LTC facility.
B. The majority of states have filial laws.
C. Filial laws received new life because of the Deficit Reduction Act of 2005.
D. Filial laws are designed to incentivize people to forgo long-term care
insurance.
A
- The answer is B. 30 states have filial laws
29
Q
- Which of the following statements best describes the Beacon Place Model for
retirement housing? (LO 16-1-2)
A. This model provides continuing care at home. Services are brought to the
client. People who live in the same neighborhood set up an organization that
provides home care, transportation services, and social services.
B. This model is a skilled care facility that allows plants and pets, eating when
the client wants (not a regimented schedule), small clusters of people, and
caregivers that act more as companions.
C. This model typically collects an upfront fee. Clients pay a monthly amount
geared toward housing alternatives and sometimes health care options.
D. There are two models—age 55 and age 62. The age 55 housing alternative
requires that only 80 percent of the residents be over 55. The age 62 housing
alternative requires that everyone in the community be over 62.
A
- The answer is A. Statement B describes the Eden Model. Statement C describes a
continuing care retirement community. Statement D describes an active adult living
facility
30
Q
- Which of the following statements about the taxation of gain on the sale of a client’s
principal residence is correct? (LO 16-2-3)
A. A client who lives in a home for 1 year can never exclude the gain on the sale
of his/her home.
B. A client who retires can exclude the entire amount of gain on his house as
long as he/she meets the ownership and use tests and has not sold a house
in the past two years.
C. A surviving spouse can continue to use the $500,000 exclusion amount on
the sale of the principal residence for the two years following the deceased
spouse’s death.
D. A widow and widower who both own separate homes can marry, move into
an apartment and both exclude $500,000 worth of gain on their home as long
as they are filing jointly.
A
- The answer is C. Statement A is incorrect for two reasons. First, if the client is
incapable of physically or mentally providing self-care, then the 2-year “use test” under
Tax Code Section 121 (exclusion on the gain from the sale of the home) becomes
essentially a 1-year test because time in a nursing home counts as time in the home.
Second, partial exclusions apply if, for example, the client needs to move in with a
daughter based on his health. Statement B is incorrect because the exclusion is limited
to $250,000 if single or $500,000 if married filing jointly. Statement D is incorrect if the
widow and widower sell their lifetime homes either before or shortly after their marriage
in order to move into an apartment, each gets to exclude only $250,000 of gain. This is
the case even if they are married filing jointly when they sell their homes
31
Q
- Residents pay an initial fee deemed to be an acquisition cost for their dwelling unit.
They also pay monthly fees. When they move to a higher level of care, the facility
“resells” their unit and the resident receives their initial investment back. These
statements describe which type of Continuing Care Retirement Community (CCRC)?
(LO 16-3-2)
A. Equity models
B. Fee for service models
C. Type A models
D. Type B models
A
- The answer is A. With fee for service models (answer B), residents pay an entrance
fee and monthly fees. When they move to a higher level of care, they will pay current
market rates for that level of service, which will result in higher fees. With type A models
(answer C), entrance fee and monthly fees include a prepayment of health care
benefits. Monthly fees do not increase because of a resident’s move from one level of
care to another. With type B models (answer D), entrance fees and monthly fees must
be carefully considered in the terms of the contract. They may include either a discount
for higher levels of service or a period of time when there are no changes in fees for the
higher level of care
32
Q
- Which of the following statements about the people and policies involved with aging
in place is correct? (LO 16-4-1 and 16-4-2)
A. Geriatric care managers provide an Occupational Therapy Assessment.
B. The National Association of Home Builders can help the client to identify a
Certified Aging-In-Place Specialist (CAPS).
C. The Fair Housing Act requires the landlord to pay for and install modifications
such as wheel chair access ramps for any rental house, coop, or
condominium occupied by a disabled older person.
D. The eldercare locator identifies home modifications that are deductible on a
client’s federal tax form.
A
- The answer is B. Statement A is incorrect because geriatric care managers are
professionals who coordinate home health care, inform clients about home health care
options, and put together a care plan for how things will be handled. The Occupational
Therapy Assessment is a client specific recommendation provided by an occupational
therapy practitioner who assesses the client’s condition and makes recommendations
about how the individual can modify their home to meet the needs of their physical
limitations. Statement C is incorrect because the Fair Housing Act requires housing
providers to allow your client to make reasonable modifications to their apartment, rental
home, coop, or condominium like grab bars and access ramps. The expenses are paid
for by the client, not the landlord. Statement D is incorrect because the eldercare
locator is an internet source that lists the resources that are available in the community
for a senior who chooses to age in place
33
Q
- Which of the following statements concerning a HECM reverse mortgage is correct?
(LO 16-5-1)
A. Only single-family residences can qualify for a loan.
B. The age of the oldest homeowner is used to determine how much can be
borrowed.
C. An individual who owns two homes can have two loans.
D. The loan has to be repaid only after an eligible non-borrowing spouse leaves
the home
A
- The answer is D. A is incorrect as condos, 1-4 unit homes, and modular homes are
all eligible. B is incorrect because the age of the youngest owner is used to calculate
how much can be borrowed. C is incorrect as an individual can only have one principal
residence and can only have one loan. D is correct because to protect non-borrowing
spouses from losing their homes, as long as the spouse qualifies as an “eligible nonborrowing
spouse,” the loan only has to be repaid when the spouse permanently leaves
the home.
34
Q
- Which of the following is the best definition of moral relativism? (LO 17-1-1)
A. The theory that there is no absolute standard concerning what is moral or
immoral.
B. The theory that we should be tolerant of other people’s beliefs and values.
C. The theory that we should not judge without understanding.
D. The theory that there is an absolute standard of right and wrong.
A
- The answer is A. This statement best defines moral relativism.
35
Q
- Which of the following best describes the central ethical dilemma in working with
elderly clients? (LO 17-1-2)
A. The standard model used to promote the best interest of the client creates
outcomes that harm the client.
B. It is impossible for advisors to generate sustainable profits when advising
elderly clients.
C. Elderly clients are unusually risk tolerant.
D. Elderly clients are irrational and make poor decisions.
A
- The answer is A. This statement best represents the central ethical dilemma
36
Q
- What is the BEST definition of elder abuse? (LO 17-2-1)
A. Failing to or doing something that results in harm to an elderly person.
B. Doing something that results in harm to an elderly person.
C. Failing to do something that results in or puts a helpless older person at risk
of harm.
D. Failing to or doing something that results in harm or puts a helpless older
person at risk of harm.
A
- The answer is D. This is the most complete definition, describing all the
circumstances that can result in elder abuse
37
Q
- Which of the following statements accurately describes the investment strategy for
the “safety-first” retirement income approach? (LO 18-1-1)
A. Assets are matched to goals so the risk levels are comparable.
B. A total return approach is used.
C. A time-segmented total return approach is used.
D. A buy and hold indexing approach is used
A
- The answer is A. The safety-first approach uses a liability-driven investment
strategy.
38
Q
- Which of the following is one of the primary risk management tools for the
“probability based” retirement income approach? (LO 18-1-2)
A. Portfolio diversification
B. Hedging
C. Insurance
D. Variable annuities
A
- The answer is A. Precautionary savings and Portfolio diversification are the two
primary techniques
39
Q
- Which of the following statements about the impact of shifting from lower yield bond
into higher yield bond investments is least likely to be correct? (LO 18-2-2)
A. It can increase the credit risk of the portfolio.
B. It can extend the duration of the income portfolio.
C. It can decrease the tax efficiency of the portfolio.
D. It can reduce the volatility of the portfolio.
A
- The answer is D. Higher yield bond investments are likely to increase volatility as
higher yields are created with a longer duration or increased credit risk.
40
Q
- John inherits an IRA account from Uncle Milt. Uncle Milt’s estate paid estate taxes
as a result of the IRA account. Which of the following statements is (are) correct about
the tax treatment of withdrawals. (LO 13-2-1)
I. John will pay income taxes with each withdrawal but will get a prorated income
tax deduction based on the estate taxes paid.
II. John will be able to roll the inherited IRA into his own IRA as a way to defer
having to pay any income taxes.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
A
- The answer is A. B is incorrect as nonspousal beneficiaries cannot roll benefits into
their own IRAs
